Ambev S.A.

Good morning, good afternoon, and thank you for waiting. We would like to welcome everyone to UMBAV's second quarter 2023 results conference call. Today with us, we have Mr. Giange De Sachi, CEO for UMBAV, and Mr. Lucas Lira, CFO and Investor Relations Officer. As a reminder, a live presentation is available for downloading on our website, ri.umbav.com.br, as well as through the webcast link of this call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company's presentation. After MBAP's remarks are completed, there will be a Q&A section where we kindly ask that each participating analyst asks only one question. At that time, further instructions will be given. Should any participant need assistance during this call, please press Start and Zero to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of a management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Unbev and could cause results to differ materially from those expressed in such forward-looking statements. I would also like to remind everyone that, as usual, the percentage changes that will be discussed during today's call are both organic and normalized in nature. In a less otherwise stated, percentage changes refer to comparisons with second quarter 2022 results. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Embaft's normal activities. As normalized figures are non-GAAP measures, the company discloses the Consolidated Profit, EPS, Operating Profit, and EPI TDA on a fully reported basis in the earnings release. Now, I'll turn the conference over to Mr. Giorgio Deissati. Mr. Giorgio Deissati, you may now begin your conference.

Hello, everyone. Thank you for joining our Q2 earnings call. Q2 was all about consistency. Top-line momentum persisted, with net revenue up 20%. EBITDA grew 34% at a consolidated level and 20% ex-Argentina, with Brazil growing 29%. International operations continued to recover, with CAC and Canada delivering EBITDA growth and last with steady momentum. Operational leverage continued to come back, with gross margin expanding 170 basis points and a beta margin expanding 300 basis points. And although net income declined given last year's one-off tax credit, cash flow from operating activities increased $1.2 billion. So we end H1 having delivered over 23% net revenue growth, 37% EBITDA growth, and 310 basis points of EBITDA margin expansion, and well positioned for H2. So let's take a closer look at performance by geography, starting with Brazil, which continued to lead the way. In Brazil beer, commercial momentum remained resilient. Top line grew 10%, with volumes declining 2.5%, due mainly to a soft industry. However, despite the decline in industry, premiumization trends continued. Our premium brands grew volumes in the mid-30s, and we gained market share in the segment according to our estimates. And just to put things into perspective, this year-to-date volumes of our premium brands grew 180% versus that same period of 2019. In addition, the disciplined execution of our revenue management initiatives, combined with positive brand mix, led to net revenue per hectolitre growing nearly 13%. Our brand building efforts continued to pay off. Brand health indicators of focus brands improved again, both sequentially and versus last year. And our brands also added 4 million fans since the pre-pandemic period, according to our estimates. And we were awarded 13 Lions in the Cannes Festival this year. Brahma brought home five awards, Budweiser four, and Zed Delivery was also recognized for the first time in the event with one award. And finally, EBITDA growth accelerated to almost 30% this quarter. In addition to the sustained commercial momentum, EBITDA performance was positively impacted by two things. First, lower growth in terms of costs. Cash costs per hectolitre, excluding non-AMBEV marketplace products, grew only 4.6%, thanks to a combination of our tailwinds from FX and commodities hedges. a lower than expected inflation and unhedged commodity prices as well as a more efficient supply chain given a better production and distribution footprint. And second, by lower distribution and administrative expenses. In Q2, we began to cycle last year's increase in diesel And our efforts to optimize our business by streamlining and integrating our B2B, DTC, and FinTech with the rest of the organization continued to make great progress. During 2022, we developed a comprehensive plan to establish a new operating model better suited for Ambev to work as a platform. And the results are starting to show more and more, not only in terms of more collaboration across the company, but also in terms of a leaner and a more agile organization. Turning to Brazil NAB, I would highlight three points. First, top line grew 7.5%, thanks to net revenue per hectolitre growing 10%. given our revenue management initiatives and a positive brand mix contribution. This offset the 2.2 declining volumes, which suffered mainly from a soft drink industry. Second, our brands continued to perform well in the premium, health and wellness, and energy beverages markets. with Pepsi Black outperforming once again, growing about 170% and now representing about 19% of our Pepsi Cola volumes. And Guaraná, Antarctica also was recognized at Cannes for its Women's World Cup campaign. And third, EBITDA grew nearly 25%, with gross margin expanding 490 basis points and EBITDA margins expanding 310 basis points. Now, let's cover our international operations, which, as I mentioned before, continued to recover. Starting with CAC. Despite the 2.8% volume contraction, top line grew almost 5%, led by the Dominican Republic, which is the most important country in the region, representing historically around 80% of our EBITDA results on average. Not only did macro conditions improve sequentially, but also we continued to put our operations back on track. For instance, volumes of the Presidente family rose 3% in the quarter, while inventory at wholesaler level normalized and price execution remained consistent. And after four consecutive quarters of decline, EBITDA grew almost 8% year over year. And both gross and EBITDA margins expanded 100 basis points. What's more, year-to-date organic EBITDA growth is above 2021 level, which was our best performing year in CAC. We still have work to do here, but happy to see CAC recovering and in a sustainable way. In last, top line grew roughly 82%. Volumes were slightly positive, growing 0.6%, led by Chile and Paraguay. But it's also worth noting that our beer volumes in Argentina grew low single digits, despite the short-term volatility and challenges in the country. Speaking of Argentina, beer gained share of stroke as a category. Our above-core brands continued to gain weight in our volumes. We were also awarded with eight Lions at the Cannes Festival, this year with Kilms and Stella Artois campaigns. But Laz is not just about Argentina. The rest of the region delivered a solid quarter, with double digits, top line and bottom line growth, and gross margin and EBITDA margin expansion. Paraguay and Chile were the highlights with great performance across the board. All in all, Lazebita grew 110% with gross margin expanding 160 basis points and EBITDA margins expanding 380 basis points. And finally, Canada. Top line performance was flat with 6.6 net revenue per hectolitre growth and a 6.2 volume decline as we underperformed a softer industry and faced a tough comp in Quebec. Having said that, our above-core brand's health indicators continue to improve in the country, especially on our premium brands. Corona and Mi Club Ultra continue to grow volumes, supporting estimated market share gains in premium and core plus, respectively. And the beta grew a little over 4%. with gross margins contracting 70 basis points, but the beta margins expanding 120 basis points. Well, with H1 behind us, a few words on H2, starting with what's more clear to us. in brazil our commercial strategy is in good shape given the health of our brands the better mix the execution in bees both in terms of client nps and expansion of marketplace and in the delivery our cost outlook for the year has improved we are updating our guidance and currently expect brazil beer cash cogs per hectolitre to grow between 2.5% and 5.5% for the full year. And we should continue to benefit from less pressure in terms of distribution, and administrative expenses during the second half of the year for the reasons I previously mentioned. And outside Brazil, what I would highlight is CAC, where year-over-year performance should continue to improve given our sequential recovery and as we lap last year's soft H2. in terms of where we have less visibility i would say the two main points are industry volumes in brazil where we will continue to closely monitor disposable income drivers and overall operating environment in argentina which has been and will continue to be a point of attention All in all, although we may still face some degree of volatility and short-term challenges varying market by market, I believe it's fair to say that our strategy has been working for a while now, and I am confident in our team's ability to continue executing it going forward. And finally, we will continue to work together. towards delivering growth and profitability in H2, as well as a better organic EBITDA growth in 2023 than the 17.1% that we delivered in 2022. We closed H1 with over 37% EBITDA growth, so we are well on track to deliver another year of continuous and consistent improvements. With that, thank you very much. Let me hand it over to Lucas.

Thank you, Jean. Good morning, good afternoon. Since you already covered the main performance indicators, and since Q2's performance was consistent in terms of what should not change and what should change this year versus 2022, I will focus on net income, cash flow generation, and taxes. Starting with taxes, two relevant updates here. First, in early July, Brazil's House of Representatives approved the tax reform on indirect taxes, which is intended to simplify the different federal, state, and municipal taxes that are currently levied on consumption, while not increasing the overall tax burden, thus creating conditions for Brazil to deliver better economic growth. The legislative debate now moves to the Senate, which will analyze the proposed changes during the course of H-2. Since the legislative process is ongoing, and since the draft legislation approved by the House is still subject to change, it's still premature to comment in more detail on what to expect going forward and potential impacts on the industry and our business. Having said that, we welcome any tax reform that reduces the complexity of the Brazilian tax system and that does not increase the total tax burden, which is already among the highest in the world. As for direct taxes, including potential changes to the deductibility of the IOC, despite continued speculation, there has not been any material concrete development on the legislative front. We will keep the market informed accordingly. And second, in terms of tax litigation in Brazil, As of June 30, 2023, our tax disputes classified as having a possible but not probable chance of loss reduced by nearly 5 billion reais compared to December 31, 2022, as a result of favorable decisions we obtained in several different disputes. We expect the administrative and judicial courts to continue ruling on certain of our tax positions during H2, such as tax assessments received in connection with the deductibility of the IOC, the deductibility of goodwill amortization expense, as well as the case related to the ICMS substitute in the taxable basis of the PIS and the COFINS. For further details, please refer to item 26 in the notes to our financial statements. We will keep the market up to date should there be any material developments, and as mentioned before, we believe the merits of our legal positions will ultimately prevail. Now let's turn to our Q2 financial performance, starting with net income. Normalized profit totaled nearly 2.7 billion reais in Q2, which represents a 13% decrease versus last year. Two points worth making here. First, last year's figure was positively impacted by roughly 1.2 billion reais in one-off tax credits recognized in Brazil. If you disregard such one-off and related effects, our net income would have grown 18% year over year. And second, although net finance results totaled an expense of about R$1 billion, which was around R$500 million worse than last year, losses from derivative instruments used pursuant to our hedging policy, which has been a pain point historically, actually declined close to R$400 million. This reduction is a result of lower USD exposure and lower carry costs in Brazil and Argentina. As you may recall, since Q3 2022, we've been reducing the financial hedges in Argentina and our net finance results have been positively impacted since then. This should continue to be the case in Q3 and to a lesser extent in Q4 as we lap the reduction in exposure and hedging. As for cash flows, good news here. Cash flow from operating activity totaled approximately 3.4 billion reais in the quarter, which is 1.2 billion reais above last year. As a reminder, our cash flow from operating activities is highly impacted by the seasonality of our business and heavily skewed towards the second half of the year. For instance, in the last seven years, over 80% of our cash flow from operating activities was generated in H2. Similarly, working capital tends to be stronger in H2. However, due to its nature, it can be more volatile on a quarterly basis. Q1 is typically the weakest performance of the year, and working capital improves sequentially throughout the year. So let's break down Q2. If you look at it from a geographic standpoint, the biggest year-over-year improvement came from Brazil, followed by Las, Argentina and Chile, and Caqui. In terms of working capital, receivables improved about 900 million compared to last year, driven by lower tax credit recognition in Brazil versus Q2 2022, as well as volume performance in CAQ, Argentina, and Canada. Inventory is improved by 1.3 billion reais compared to last year, mainly driven by a reduction in days of inventories year over year, not only in terms of finished goods, but also packaging and raw materials in Brazil, Argentina, and in Canada. And as for payables, results were pretty much flat when compared to last year, driven mostly by Brazil and Canada. In Brazil, non-income tax payables, which had a negative year-over-year impact in Q1, had a positive effect in Q2, given our end-of-quarter sales performance. And this improvement was offset by lower payables in Brazil, mostly given the reduction of inventories and lower cap expense. And in Canada, we were up against a tough comp on non-income tax payables, as H1 2022 taxes were deferred to H2 due to COVID. However, this adverse impact should subside through the end of the year. All in all, following the improvements in Q2, cash flow from operating activities in the first half of the year ended ahead of H1 2022. And if we take a step back and look at longer-term trends, it's important to highlight three points. First, our receivables as days of sales have been declining over time, especially in Brazil, mostly given channel mix. Second, our inventories as days of COGS have been increasing given a combination of higher level of safety stock to navigate the supply chain disruptions caused by COVID-19 and sustained service level, more vertical operations, and a greater SKU assortment. And third, when we look at our payables as days of COGS, CAPEX, and SG&A, although the current figure is below the peak in 2020, it's currently over 130 days on average. Large suppliers have payment terms longer than 90 days, and they represent more than 55% of our spend, whereas small suppliers represent around 30% of the spend and have payment terms of around 30 days. Before moving to Q&A, I would like to invite everyone to join our ESG update, which we plan to host virtually in November. Stay tuned for more details. With that, let me turn it back to the operator.